Argentina's debt

Grinding them down

Brutal tactics may pay off—for now

IT HAS taken three years of stonewalling and bad-mouthing. But this week Argentina's government formally issued its take-it-or-leave-it offer to holders of $81 billion of bonds on which it defaulted in December 2001. The terms are harsh. Even so, most bondholders will probably accept them. What is less clear is whether this will be enough to turn Argentina's powerful recovery from economic collapse into sustained credit-driven growth.

At a series of presentations around the world due to start on January 14th, Argentine officials will present creditors with a choice of 16 different bonds in four currencies. One set aimed at individuals maintains its face value, but pays little interest and will not mature until 2038. Another, aimed at investment funds, involves a loss of two-thirds of face value but pays more interest. In all cases, the present value of the new bonds is barely above 30 cents per dollar originally invested. This write-down is nearly twice as big as the average in recent sovereign-debt restructurings.

Many bondholders are furious. They say Argentina, whose economy is growing strongly (see chart), could pay more. That is debatable. Even if most bondholders agree to the swap, Argentina's public debt would still stand at a whopping 80-90% or so of GDP. But what can the bondholders do? The government has few assets abroad that its creditors could seize.

Argentine officials have kept up their bullying tone to the end: they vow not to pay a cent to those who reject the deal. They know that co-ordination among hundreds of thousands of investors is hard. Much of the debt is held by locals or by “vulture” funds which bought it cheap.

Despite Argentina's rough treatment of its creditors, emerging-market debt has boomed over the past 15 months. So the potential resale value of the new bonds has risen, adding ten cents or so on the dollar to the offer. Even so, there is a risk. In the past, foreign courts have tended to award full repayment to bondholders who stick it out. Even if only a minority do, this could be costly. But a “successful” debt deal would allow Argentina to resume talks with the IMF on rolling over the $14.4 billion it owes the Fund. The government has defined success as swapping at least 50% of bonds; the IMF says 80%.

If Argentina's gamble pays off, President Néstor Kirchner will make the popular claim that he has outfaced the IMF and foreign “speculators”. But even a successful deal will leave a sour taste in the capital markets. The government's calculation is that it—and the economy—can live without foreign financing. Thanks to booming prices for its farm exports, and extraordinary taxes on them, the government racked up a primary fiscal surplus (ie, before debt payments) of 4.2% of GDP last year. The new bonds' long maturity and low interest rates should make debt service manageable. Meanwhile, officials say that investment will come from Argentines' repatriating capital to supply buoyant domestic demand.

The trellis underpinning such rosy reckonings is a booming world economy awash with cheap money. If and when those conditions change, Argentina could find itself in trouble again—and with no stock of goodwill.